Sprint: Credit Suisse, BTIG Size up Clearwire Potential

By Tiernan Ray

Shares of Sprint-Nextel (S) are down 5 cents, or 0.8%, at $5.68 after the company this morning saidJapan‘s Softbank, owner of that country’s third-largest cellular operator, would purchase 70% of Sprint for $12.1 billion, $8 billion of which would be in cash to Sprint shareholders.

The Street is looking favorably upon the deal, as far as the sell-side community is concerned, although an open question is whether Clearwire, Sprint’s broadband wireless partner, 49% owned by Sprint, is going to become part of the deal. As of this morning, Sprint and Softbank executives said the deal makes no obligations around Clearwire and declined to speculate whether anything would be done about Clearwire as a consequence.

Clearwire shares are up 37 cents, or 16%, at $2.68, and rose as high as $2.96, clearly anticipating some benefit, if not now then down the road. Given the emphasis placed by both Sprint and Softbank on rolling out faster 4G wireless service, of the “long term evolution,” or LTE, variety, it would seem Clearwire’s network and spectrum might be important to the two. Sprint has already committed to paying Clearwire hundreds of millions of dollars for future LTE services, as noted in Clearwire’s most recent 10-K.

In a note to clients this morning before the official Sprint announcement, Credit Suisse‘s Jonathan Chaplin, who rates Sprint shares Outperform, and doesn’t formally cover Clearwire, writes that “the roll-up has begun” in wireless, predicting, “Softbank’s investment will spark further consolidation, likely starting with Sprint’s acquisition of Clearwire.”

Further, Softbank will then “go after other independent carriers in a bid to create a wireless company that will rival AT&T and Verizon in scale,” which is good for Sprint, but also good for wireless in general.

Chaplin lays out the shape of a Clearwire acquisition, as he sees it:

We believe Clearwire’s spectrum is a tremendously valuable strategic asset with an intrinsic value of at least $4.50 / share. The market has clearly taken a dimmer view of this spectrum. As such, we are not sure how the market will respond to Sprint consolidating Clearwire. In the analysis below, we assume Sprint acquires the Clearwire equity it doesn’t own in an all-stock transaction at a price of $4.50 / Clearwire share. We then assume that they call the $2.9BN in 12% 1st Lien debt that is due in 2015, resulting in pro forma equity value of $31.7BN and EV of $42.9BN. This assumes that the market gives Sprint $6.2BN in equity value credit for Clearwire. Clearwire would likely have an EBITDA loss of ~$629MM in 2012 (-158MM CS12 EBITDA – 471MM wholesale revenue) once you eliminate the revenue that Clearwire receives from Sprint; however, we think Sprint would be able to rationalize Clearwire’s costs relativelyquickly, reducing the EBITDA losses in half to ~$314MM. Sprint would trade at 5.6x our pro forma 2014 EBITDA estimate, assuming Sprint gets full value for Clearwire at $4.50 a share.

In a research note this morning, BTIG‘s Walter Piecyk,also writing before this morning’s press release, maintains that Clearwire could be critical to a deal, not least because of the sharks circling Clearwire if Sprint doesn’t pick them up:

To restate, there is no confirmation that gaining control over Clearwire is a condition of SoftBank’s deal to buy Sprint but if it is, Sprint’s competitors AT&T, Verizon and Deutsche Telekom or perhaps even future potential partners Dish Networks (DISH) or DirecTV (DTV) might consider launching their own tender for Clearwire’s stock. Sprint’s 48% equity stake could be a significant hurdle in completing a competing transaction. It has been previously reported, but not confirmed, that Dish may had already started building a position in Clearwire’s debt. DirecTV had urged the FCC to require the sale of Clearwire’s stock by cable operators as a condition for approval of Verizon’s purchase of SpectrumCo. We believe that many in the communications are thinking about their 5 year game plan based on the maturation of the wireless industry, the over the top risk to linear programmers and the proliferation of smartphones which has accelerated the “move to mobile”.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.